Gold and the Flood of Cheap Government Money

"...If we allow governments to control finance, we give them extraordinary
power over which projects are allowed and which are deemed inappropriate..."

The BRITISH PRIME MINISTER, Gordon Brown, says the current mess in
world finance and credit is the fault of "irresponsible" bankers.

Well, he would say that, wouldn't he?

Let's not forget that Mr.Brown claimed the credit for 10 years of unbroken
growth here in Britain. For those 10 years he copied Alan Greenspan - the ex-US
Fed chairman - by holding interest rates unusually low, aiming to encourage
investment and demand, which is a near-sighted economist's way of avoiding
mild recessions.

But this low-interest rate medicine stimulates both the supply and the demand
for those products which Mr.Brown now blames bankers for promoting. It leads
directly to a world of crazy finance, because low rates punish caution.

In a time of state-sponsored easy credit all projects get financed by incautious
banks with cheap, centrally supplied money. There is no market for cautiously
lent money, priced correctly for the risk involved. Why would anyone pay more
for funds from a cautious bank when cheaper funds are available from easier
sources?

This is why the profits of incautious banks grew, and why their stock prices
multiplied. Meanwhile careful bankers sunk. As Brown (and Greenspan) injected
ever more money into the economy the cautious banks began to lose their customers,
their managers, their share values, and their independence. This Darwinian
extinction of caution is the direct result of a monetary environment which
was hostile to cautious bankers, one which favored those banks with an appetite
for cheap money.

So be in no doubt about the cause of the credit crunch. It was too much cut-price
credit, and the blame for the supply of it rests squarely on the likes of Gordon
Brown and Alan Greenspan.

So much for the blame. What now?

It seems almost everyone - from both the right and the left of the political
spectrum - agrees that the world needs more government intervention in the
form of bail-outs and increasing regulation. We're getting it, too.

Yet once we have grasped that the underlying cause of this disaster was credit
creation by government itself, we should perhaps be a bit wary of putting governments
ever more in charge.

Governments operate a cheap credit policy in order to defer pain, stay popular,
and get re-elected. The US, British, Australian, Russian and now pan-European
bank rescues are intended to create and promote a higher volume of cheaper
and easier credit than the market really wants. They aim to supply yet more
of the wretched stuff which got us here in the first place.

Is that really so wise?

If we allow governments to control finance through regulation, we give them
extraordinary power over the direction of the economy. Because they can (and
will) deny finance to some projects and grant it to other, more politically
appropriate ones. Such government control has repeatedly shown itself to be
much worse than our imperfect marketplace at handling the power of economic
direction - both in this case, where their efforts at economic stimulation
are the root cause of the fiasco, as well as in recent history, particularly
with communism.

The new rush of bail-outs, and their associated tighter regulation, pushes
us further towards the socialized "command" we thought the world had abandoned
in 1989. That is bad - and there is a better way to rapidly re-configure our
economies in the right way:

More than ever we need to trust the market. Let interest rates rise (without
government interference) and allow the market to kill off those institutions
whose functioning depends on limitless supplies of cheap credit.

Yes, there would be pain, but it would right a long list of wrongs. It would
make houses affordable for younger working people. It would make saving worthwhile
again. It would make borrowing less attractive. It would increase the use of
equity in the financing of enterprises, and significantly decrease their use
of debt, making all of them much safer in future downturns.

Each of these moves in the right direction are, sadly, the moves which yet
another dose of rescue money will now suppress. This won't be understood by
our politicians, however, so we will get yet more patched-up bail-outs - and
lots more regulation besides.

Did you notice? While the United States, Britain, the Netherlands and Australia
were banning short selling on their local stock markets, the Chinese were relaxing
restrictions on it. This is enormously telling. Asians - suppressed by the
command economy for decades - aspire to a world of free enterprise. Unlike
us they are now prepared to accept the costly consequences of those repeated
errors which the free enterprise system allows people to make.

When we finally wake up under the yoke of our new, improved and over-sized
government regulators, we will have lost the privilege of benefiting from free
and highly profitable financial centers. It's the turn of Hong Kong, Mumbai,
Shanghai, and Singapore.

Oh well - it was nice while it lasted. And from an avowedly selfish point
of view, I think it is almost certain that these tax-funded bail-outs will
be good for me personally, because they will be good news for BullionVault.

I believe we will now avoid the pain of a sharp correction. Instead we will
get many years of miserable underperformance in shares, bonds and deposits
- the classic backdrop to a strong bull market in Gold.

With no bailout, gold would probably rocket even faster than it has this week,
and within a few months it would have fully appreciated. That would be time
to exit gold and start buying bombed-out productive assets instead.

The speed of such an ascent in Gold
Prices would be highly profitable for gold owners (including me), but
it would probably prevent BullionVault from aggregating more than a few thousand
new customers in total. My personal ambitions for the business would never
be met.

Instead, as all this bail-out money seeps in, I anticipate some temporary
relief for the stock market, followed by a long, slow, miserable slide in mainstream
investment performance, accompanied by a steady rise in the value of Gold
Bullion.

Every month, this on-going shift from paper to gold...from debt to hard assets...will
cause a few thousand more people to join BullionVault,
buying and selling solid gold bullion - safe and secure in their choice of
Zurich, London or New York - at ever-higher live market prices.

So - entirely hypocritically - I believe one outcome is required, yet hope
for another! Knowing governments won't allow the incautious banks to fail,
I can only look forward to helping more investors each day move a portion of
their wealth into gold.

Please Note: This article is to inform your thinking,
not lead it. Only you can decide the best place for your money, and any decision
you make will put your money at risk. Information or data included here may
have already been overtaken by events - and must be verified elsewhere - should
you choose to act on it.